EPC CONTRACTS IN

POWER SECTOR

Rohit KanthRoll No 40

Contract Models

• Turnkey Contracts• Guaranteed price for

execution• Guaranteed timeline for

completion• Procurement undertaken

solely by the contractor• Design & Engineering:

responsibility of the contractor

• Contractor is single point of contact for all matters for the project developer

• Significant risks are transferred to contractor

• Package based contracts• No guarantee on the price• No guarantee on the

timeline• Procurement: As per

agreement between the two parties

• Design & Engineering: Responsibility of the owner/developer

• Owner/developer has to coordinate with several participants along with the contractors

• Significant risks retained with owner/developer

Government

Project Company

Sponsors Lenders

OfftakerFuel

SupplierO&M

ContractorEPC

Contractor

EPC Contract

PPAFSAO&M Contract

Equity Support Agreement

Financing & Security Agreement

Concession Agreement

Bankability• A bankable contract is a contract with a risk allocation between the

contractor and the project company that satisfies the lenders.

• In assessing bankability lenders will look at following range of factors:• A fixed completion date • A fixed completion price

• No or limited technology risk

• Output guarantees

• Liquidated damages for both delay and performance

• Security from the contractor and/or its parent

• Large caps on liability (ideally, there would be no caps on liability, however, given the nature of EPC contracting and the risks to the contractors involved there are almost always caps on liability)

• Restrictions on the ability of the contractor to claim extensions of time and additional costs.

Basic features of an EPC contract • The key clauses in any construction contract are those which

impact on:

• EPC contracts provide for:• A single point of responsibility: The contractor is responsible

for all design, engineering, procurement, construction, commissioning and testing activities.

• A fixed contract price: Risk of cost overruns and the benefit of any cost savings are to the contractor’s account.

• A fixed completion date: EPC contracts include a guaranteed completion date that is either a fixed date or a fixed period after the commencement of the EPC contract. If this date is not met the contractor is liable for delay liquidated damages (DLDs). DLDs are usually expressed as a rate per day which represents the estimated extra costs incurred (such as extra insurance, supervision fees and financing charges) and losses suffered (revenue forgone) for each day of delay

• Performance guarantees: EPC contracts contain performance guarantees backed by performance liquidated damages (PLDs) payable by the contractor

EPC Contra

ct

Time

Cost

Quality

• Caps on liability: EPC contractors will not, as a matter of company policy, enter into contracts with unlimited liability.

• Security: The security takes a number of forms including• A bank guarantee for a percentage, normally in the range of 5–15%, of the contract price.

• Retention, i.e. withholding a percentage (usually 5 –10%) of each payment.

• Advance payment guarantee, if an advance payment is made • A parent company guarantee – this is a guarantee from the ultimate parent (or other suitably related entity) of the contractor which provides that it will perform the contractor’s obligations if, for whatever reason, the contractor does not perform

• Variations: The project company has the right to order variations and agree to variations suggested by the contractor

• Defects liability: The contractor is usually obliged to repair defects that occur in the 12 to 24 months following completion of the performance testing.

• Intellectual property: The contractor warrants that it has rights to all the intellectual property used in the execution of the works and indemnifies the project company if any third parties’ intellectual property rights are infringed

• Suspension: The project company usually has right to suspend the works

• Termination: This sets out the contractual termination rights of both parties. The contractor usually has very limited contractual termination rights.

Split EPC contracts

Guarantor

Project Company

Offshore Company

Onshore Company

Wrap around guarantee

• Wrap-around guarantee should deal with the following matters:• Guarantees and indemnities – the guarantor must

guarantee the performance of the totality of the works and the ability of the separate parts to work seamlessly

• Liquidated damages – this is linked to the issue of horizontal defences discussed above. The wrap-around guarantee must ensure that liquidated damages are paid regardless of which contractor is late and which contractor fails to perform. Similarly, the aggregate cap of liability in the wrap-around guarantee must override any caps on liability in the split contracts themselves

• Provision of a performance bond by the guarantor or its parent – it is usually prudent to have the guarantor provide security for their obligations under the wrap-

Key power specific clauses in power EPC contracts • Major power-specific interface issues are: • Access for the contractor to the transmission grid to allow timely

completion of construction, commissioning and testing (grid access). Grid access issues arise at two differing levels, namely: • The obligation to ensure that the infrastructure is in place

• The obligation to ensure that the contractor is permitted to export power

• With respect to the contractor’s ability to export power, the EPC contract must adequately deal with this risk and satisfactorily answer the following questions to ensure the smooth testing, commissioning and entering of commercial operation: • What is the extent of the grid access obligation? Is it merely an obligation to

ensure that the infrastructure necessary for the export of power is in place or does it involve a guarantee that the grid will take all power which the contractor wishes to produce?

• What is the timing for the commencement of this obligation? Does the obligation cease at the relevant target date of completion? If not, does its nature change after the date has passed?

• What is the obligation of the project company to provide grid access in cases where the contractor’s commissioning/plant is unreliable – is it merely a reasonableness obligation?

• Is the relevant grid robust enough to allow for full testing by the contractor – for example, the performance of full-load rejection testing?

• What is the impact of relevant national grid codes or legislation and their interaction with both the EPC contract and the PPA?

• Consistency of commissioning and testing regimes:

Relevant testing issues which must be considered include: • Are differing tests/trialling required under the EPC contract and the PPA? If so, are the differences manageable for the project company or likely to cause significant disruption?

• Is there consistency between obtaining handover from the contractor under the EPC contract and commercial operation?

• Is the basis of the testing to be undertaken mirrored under both the EPC contract and the PPA? For example, on what basis are various environmental tests to be undertaken? Are they to be undertaken on a per unit basis or a station output basis?

• What measurement methodology is being used? Are the correction factors to be applied under the relevant documents uniform? Are references to international standards or guidelines to a particular edition or version?

• Are all tests necessary for the contractor to complete under the EPC contract able to be performed as a matter of practice?

• Fuel specification requirements • Interface issues between the relevant government agencies and

system operator and the contractor. In particular, whilst the project company must maintain a long-term or comfortable relationship with either the government or the system operator the contractor does not.

Delay and extensions of time • The prevention principle : The legal basis of the prevention principle is unclear and it is uncertain whether you can contract out of the prevention principle. A relatively standard extension of time (EOT) clause would entitle the contractor to an EOT for: • An act, omission, breach or default of the project company • Suspension of the works by the project company (except

where the suspension is due to an act or omission of the contractor)

• A variation (except where the variation is due to an act or omission of the contractor)

• Force majeure

• Concurrent delay: A concurrent delay occurs when two or more causes of delay overlap.

• there are three main approaches for dealing with the issue of concurrent delay. These are:

• Option one – the contractor has no entitlement to an extension of time if a concurrent delay occurs.

• Option two – the contractor has an entitlement to an extension of time if a concurrent delay occurs.

• Option three – the causes of delay are apportioned between the parties and the contractor receives an extension of time equal to the apportionment. For example, if the causes of a 10-day delay are apportioned 60:40 project company:contractor, the contractor would receive a six-day extension of time.

Exclusive remedies and fail safe clauses

• Contractor’s perspective :The main reason for a contractor insisting on a project company being subject to an exclusive remedies clause is to have certainty about its potential liabilities. A contractor will also generally require the amount of liquidated damages to be subject to a cap and for the EPC contract to include an overall cap on its liability.

• Project company’s perspective: An exclusive remedies clause limits the project company’s right to recover for any failure of the contractor to fulfil its contractual obligations to those remedies specified in the EPC contract.

• Fail-safe clauses: These clauses (which would also apply to PLDs) mean that if liquidated damages are held to be unenforceable for any reason the project company will not be prevented from recovering general damages at law.

THANK YOU